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“C” = BOTH “A” “B”

“EITHER-OR” FIXATIONS IN LIFE INSURANCE: Are You Missing the “C” Option?

Steak or lobster?

Dogs or cats?

Ginger or MaryAnn?

Why do some people insist on turning every

issue into a black-or-white, either-or decision? In

theory, this mindset might simplify one‟s life (or

simply provide time-killing conversation at the

local watering hole), but most of the time an

either-or approach is neither necessary nor

desirable; quite often, finding a “C” option is

much better than choosing Option “A” and

rejecting Option “B” (or vice versa). Hey, why insist on diners having to choose between

lobster or steak when they can have surf and turf, right?

The either-or mentality shows up with some frequency in financial commentary. For

example: Stocks or bonds? Pre-tax or after-tax savings? Group or individual benefits?

Looking at these “A” or “B” sample issues, it should be obvious that “C” options are

both available and practical. A balanced portfolio usually includes a mix of investment

vehicles, not just one type. Pre- and after-tax savings plans each serve important functions

in individual finances, depending on when the accumulation might be needed. And a blend

of group and individual programs can provide customized security at an affordable price.

Despite an attention grabbing either-or headline, the answer to most “A”-or-“B” financial

questions is usually “C” – “both.” But what about this question:

Permanent or Term life insurance?

A quick survey of opinions about life insurance (in financial publications, at bookstores,

on the Internet) finds mostly a polarity of opinions; it‟s either “A” or “B,” permanent or

term. “C” options, those that might recommend both permanent and term, can hardly be

found. But considering how many other financial issues seem to include practical “C”

options, why is the discussion about life insurance so polarized and dogmatic? There are

several possible explanations.

Why people can‟t seem to find the “C” option for life insurance Permanent policies are complicated. In comparison to other financial products like

stocks, bonds and mutual funds, permanent life insurance can legitimately lay claim to

being the most complicated and multifaceted financial instrument available to the general

public. This complexity is not only because permanent life insurance consists of a blend of

savings and insurance benefits, but because different contract formats allow for an endless

variation in how the cash values and insurance features can be combined to meet individual

desires.

There is no uniformity in the evaluation process. How does an individual determine the

financial value of life insurance? This is a challenging question, one in which there is very

In This Issue…

“EITHER-OR” FIXATIONS IN LIFE INSURANCE:

Are You Missing the “C” Option?

Page 1

THE CONFOUNDING TAX CONSEQUENCES OF COMPLEX FINANCIAL INSTRUMENTS

Page 3

THE ECONOMIC COST OF CARING FOR ELDERLY PARENTS

Page 4

GETTING ORGANIZED: Essential Documents to store in one file cabinet

Page 5

FROM 107 TO 1,124 IN 32 YEARS. Should you be impressed?

Page 5

© Copyright 2011 Page 2

little consensus. For example: In a net worth statement, what

is the value of a life insurance benefit? Until the insured has

died and a claim has been paid, there is no recognized dollar

value (for a term policy). Yet having life insurance certainly

results in greater financial security. Because of the difficulty

in quantifying the financial value of life insurance, the

methods of comparing and evaluating life insurance are

numerous, reflecting a broad range of financial philosophies.

Even for term insurance, where the typical method of

evaluation is price (the lower premium is considered the best

value), other factors come into play. A 10-year term policy

will almost certainly be cheaper than a 20-year term, but what

about the cost of maintaining or re-insuring when the term

expires, especially if one‟s health changes? How can one

accurately assess this factor from a financial perspective?

In some evaluations, critics of permanent life insurance

will point to low rates of overall return in comparison to other

accumulation vehicles. Yet permanent life insurance isn‟t just

an accumulation vehicle; the life insurance benefit is part of

the package as well, and the two components are interrelated.

How accurate is an evaluation process that

attempts to separate what was intended to be

combined?

There are commissions involved.

Almost all life insurance is provided by

agents who receive commissions from

insurance companies when they help an

individual obtain coverage. Permanent

policies have larger premiums, and larger premiums mean

bigger commissions. For some observers, this commission

arrangement creates a conflict-of-interest for agents, in that

they may be induced to recommend higher premium policies

that are perhaps not suitable for consumers. Another frequent

critique of permanent life insurance policies is that the agents‟

commissions come at the expense of greater cash values for

the policyholder.

Over the past few decades, the combination of complex

products, poorly defined evaluation processes and implied

potential for a conflict of interest over commissions has led

many public “experts” to offer this advice: “Just get term

insurance. It‟s simple and cheap, and you won‟t have to worry

about getting ripped off.” In response, knowledgeable

commentators within the life insurance industry often feel

compelled to focus on strategies that justify permanent

policies for almost every scenario, both to explain their

products and defend their integrity. In a way, the strong

philosophical differences about how to view the two forms of

life insurance have left little room for discussing ways to make

them fit together. Yet there are many workable formats for

making life insurance a product with “C” options.

The “C” Options in Life Insurance Both term and permanent policies have a long history in

the marketplace because consumers have shown a demand for

both forms of life insurance. Any economist would tell you

that consumer demand validates the worth of a product or

service. In real life, no matter what the “either-or” fixated

experts might say, consumers find both term and permanent

insurance are valuable financial products. Consumers

shouldn‟t have to choose between the two products when they

say they like both.

In general, both term and permanent insurance provide

immediate financial protection, while permanent life insurance

allows this protection to become a long-term financial asset.

From a “C”-option perspective, a good life insurance plan

would be one designed to deliver maximum immediate and

long-term benefits. Fortunately, there are several ways to

accomplish this objective.

Conversion provisions for term insurance. Many term life insurance policies have provisions that allow

the policyholder to convert some or all of the term coverage to

a permanent policy, without requiring a new application or

medical exam. Convertibility provisions allow you to start

with Option “A” and change to Option “B.”

Guaranteed increase options “GIOs”*. These

provisions allow policyholders to increase their coverage by

specified amounts at scheduled intervals. For example, a

$500,000 policy may give the policyholder the option to

increase the insurance benefit by $50,000 every three years for

the first six years of the contract without additional

underwriting. Some GIOs can be triggered by

birthdays (age 30, 35, 40 etc.), while others

may be available based on events (the birth of

a child). GIOs are an acknowledgement that

as circumstances change, there may be a

desire for more coverage.

*GIO rider incurs an additional cost.

Blended contracts. Most life insurers offer contracts

that blend term and permanent protection into one contract.

Typically, this blend of coverage transitions over time from a

high percentage of term at the beginning of the contract to a

100% permanent policy. This can be an effective way to

secure maximum coverage now while providing a long-term

insurance asset for retirement and estate planning purposes.

Some of these contracts may require adjustment over time, but

blended contracts are true “C” options in life insurance.

Dividend options. Many permanent policies feature

dividend payments to policyholders. Dividends are a return of

premium and while the typical default option is to add them to

existing cash value accumulations, dividends may be applied

or distributed in a variety of ways. One common dividend

option is buying one-year-term insurance, allowing a

permanent policy to add some term insurance. (Yes, this is

another “C” option.) Note: Dividends are not guaranteed and

are declared annually by the company's board of directors.

Paid-up additions (PUAs). Most permanent life

insurance contracts are based on fixed level premium

schedules that determine the guarantees and payment periods;

some permanent policies may be designed to be paid-up in 10

years, others when the insured reaches age 100. Shorter

payment periods not only result in fewer premiums, but also

increase cash value accumulations. PUA provisions allow the

policyholder some flexibility in increasing cash values and

shortening the payment period.

One key point that doesn‟t seem to get much press: Personalized life insurance policies with features like

those mentioned above aren‟t something you can obtain by

There are many workable formats for

making life insurance a product with “C” options.

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answering five health questions over the phone or over the

internet. These policies require individual underwriting,

because an insurance company wants a more in-depth picture

of your health history and financial circumstances before

offering a customized contract.

Since the general trend for most people is declining health

as they get older, you are probably most insurable today. This

makes a strong argument for applying for as much coverage as

you can obtain as soon as possible (possibly this will be term

insurance, with options to convert or restructure at a later

date).

This brief overview of standard life insurance features

should be enough to demonstrate that “C” options abound

when it comes to life insurance. No matter what your current

financial condition, it is obvious there are ways to design a life

insurance plan that will meet both immediate needs and

position life insurance as a long-term asset in your financial

program.

CAN YOUR CURRENT LIFE INSURANCE PROGRAM COVER IMMEDIATE NEEDS AND BECOME A LONG-TERM FINANCIAL ASSET? ARE YOU USING YOUR “C” OPTIONS TO MAXIMUM ADVANTAGE?

(The next time someone asks you to decide between

Ginger and MaryAnn, say “both.”)

________________________________________

THE CONFOUNDING TAX CONSEQUENCES OF COMPLEX FINANCIAL INSTRUMENTS

There‟s a long-

standing guideline for

individual investors that

says you should never buy

a particular financial

instrument purely for its

tax-favored status – the

underlying investment

opportunity needs to make

sense apart from its tax

treatment. However, this

does not mean you can ignore the tax consequences when you

evaluate a potential investment, because taxes can

significantly impact overall returns. As more sophisticated

investment vehicles have become available to a larger segment

of individual investors, this issue has grown in importance.

A June 25, 2011, article from the Wall Street Journal titled

“Extreme Tax Frustration” detailed some of the new and often

unanticipated tax issues arising from exchange-traded funds

that include commodities in their portfolios. An exchange-

traded fund (ETF) is a security that tracks an index, a

commodity or a basket of assets like an index fund, but trades

like a stock on an exchange.

Some investors find that ETFs can be an effective way to

invest in specific market sectors, with the attraction of

portfolio diversification similar to mutual funds or other

pooled investments. However, depending on the types of

investments held by an ETF, how these investments are titled,

and how profits are distributed, the tax treatment can be

dramatically different. Here is an example from the WSJ

article:

Holders of gold stocks in a mutual fund would pay tax on

long-term capital gains (those held longer than a year) of 15%.

In contrast, shareholders of gold held in an ETF would be

taxed at one‟s marginal income tax rate, such as 28%, because

the ETF is considered to have direct ownership of gold, and all

profits are passed through the fund directly to shareholders as

regular income.

Since many ETFs are structured as partnerships, this tax

information is not reported to shareholders on a simple Form

1099, but instead on a Schedule K-1, which details the ETF‟s

income, deductions, credits, etc., and the percentage of profit

or loss apportioned to the shareholder/partner. K-1s may be

lengthy and complex, which adds significant cost to

professional tax return preparation, as well as increasing the

possibility of mistakes.

The prospect of higher tax rates and increased return

preparation costs that may accompany the purchase of shares

in some ETFs should certainly be among the issues considered

by individual investors. As Laura Sanders wrote in the WSJ

article, “The old adage „know what you own‟ may not be

enough. You also need to know what you‟ll owe.”

But what about financial vehicles in which you aren‟t sure

of the tax consequences?

A “structured product” is the generic term for sophisticated

financial instruments that feature investments whose

performance is in some way guaranteed or completed by

linking it to a pre-determined index or other security.

A “reverse convertible” is an example of a structured

product, popular with some investors because of its potential

for high yields. Here is a brief description of a reverse

convertible, provided by FINRA, the Financial Industry

Regulatory Authority, the regulatory agency that protects

investors:

“A reverse convertible is a structured product that generally consists of a high-yield, short-term note of the issuer that is linked to the performance of an unrelated reference asset—often a single stock but sometimes a basket of stocks, an index or some other asset. The product works like a package of financial instruments that typically has two components:

a debt instrument (usually a note and often called the „wrapper‟) that pays an above-market coupon (on a monthly or quarterly basis); and

a derivative, in the form of a put option, that gives the issuer the right to repay principal to the investor in the form of a set amount of the underlying asset, rather than cash, if the price of the underlying asset dips below a predetermined price (often referred to as the "knock-in" level).”

Sounds complicated, doesn‟t it? That‟s because structured

products are complicated. But what‟s even more confounding

is FINRA‟s commentary on the tax treatment of these

financial instruments, from the Authority‟s website

(www.finra.org), updated on July 29, 2011,...

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“The tax treatment of reverse convertibles is complicated and uncertain. Investors should consult with their tax advisors and read the tax risk disclosures in their prospectuses and other offering documents. Although these documents typically provide instructions on how investors should treat reverse convertibles on their tax returns, there is no guarantee that the IRS or a court would agree with that tax treatment. Little guidance in the way of court decisions or published IRS rulings has been issued on this topic. When considering the tax consequences of any investment, you may want to consult with a tax advisor.”

Note that FINRA is not questioning the integrity of

structured products in general or reverse convertibles in

particular. The performance of these products will vary greatly

depending on their structure and investment specifics, but in

general, structured products are legitimate financial

instruments that may provide real financial benefits to

consumers. The challenge is that the complexity of the product

leads to uncertainties as to their proper tax treatment.

DO YOU KNOW WHAT YOU OWE AS A RESULT OF YOUR INVESTMENTS?

INCLUDING TAXES, ARE YOU ABLE TO CALCULATE THE TRUE COST AND REAL RETURN OF YOUR FINANCIAL DECISIONS?

________________________________________

THE ECONOMIC COST OF CARING FOR ELDERLY PARENTS

Want to forecast the future? Look for

the demographics. They are huge

indicators of long-term trends, and once

in place, they tend to change very

slowly. In developed countries, a pre-

dominant demographic trend is the

combination of falling birthrates and

aging populations. These two trends are

already in place, and the impact of these factors is inexorably

working to change social and financial paradigms.

One of these areas of predictable change is the increasing

number of children caring for elderly parents. As the

combination of longer life expectancies and declining

populations puts a greater strain on government-sponsored

social safety-net programs, the default response will be

placing a greater burden on children to care for their parents.

This change is not only foreseeable, but already gaining

momentum. Data complied by the National Alliance for

Caregiving from the U.S. Health and Retirement Study is

telling. Look at the differences between 1994 and 2008:

Percentage of men and women providing care for an aging parent:

1994 2008 Men 3% 17% Women 9% 28%

When almost 3 in 10 women are caring for an aging

parent, it is a significant statistical trend. And the statistics

also show clear correlations to changing social and financial

dynamics.

Citing the same report, a June 14, 2011, Wall Street

Journal article by Kelly Greene (“Toll of Caring for Elderly

Increases”) notes that “the steep rise in people caring for

elderly parents is taking a toll on the health and finances of

many baby boomers.”

Among the workers over age 50, those who work and

provide care for a parent at the same time are more likely to

experience poor health, stress, depression and chronic disease.

The report indicates these health problems are principally “a

result of their focus on caring for others.”

One of the prominent sources of stress is financial cost to

children when they become caregivers. A June, 2011 report,

Study of Caregiving Costs to Working Caregivers, by

MetLife‟s Mature Market Institute, put this cost at over

$300,000 per person over age 50 if they are taking care of

elder family members. This number reflects lost wages,

pensions, and Social Security benefits over their lifetime, due

primarily to a reduction in working hours, or leaving the work

force entirely early to care for a parent.

As the numbers above indicate, there is a disparity

between men and women as to who is most likely to be a

caregiver. The Metlife study found that daughters were more

likely to provide basic care while sons were more likely to

give financial assistance.

Since they are often the ones providing day-to-day hands-

on assistance, women are also the ones who are more likely to

leave the workforce, and experience the greatest financial loss.

The study broke down the financial losses as follows:

$142,693 in lost wages

$131,351 lost in Social Security

$50,000 lost in pension benefits or matching

contributions to defined-benefit plans.

$324,044 Total

It‟s important to note that these numbers are simple

aggregates. They don‟t factor the accompanying lost

opportunity cost (LOC) that results. For example, what would

the $50,000 lost in pension benefits or matching contributions

be worth after being invested for 15 or 20 years? The number

and time period used to calculate the LOC is arbitrary, but

even a conservative factor could easily forecast a financial loss

approaching $1 million.

Appropriate Responses The math of taking caring of an aging parent looks ugly.

But when it comes to family, financial sacrifice isn‟t going to

keep most children from doing the responsible and loving

thing by caring for their parents. And the social value of

maintaining these family ties far outweighs most financial

considerations; placing the full responsibility for eldercare on

strangers isn‟t usually the best for children or parents. But that

doesn‟t mean parents or their children should ignore the

financial consequences. Good financial decisions can improve

many caregiving situations.

For parents who recognize either the likelihood or

desirability of having their children be caregivers, any

preparation will be helpful. This often starts with simply

© Copyright 2011 Page 5

organizing your financial affairs, then educating your children

about your wishes and available assets. For some, this

preparation might include rethinking Long-Term Care

insurance, or redirecting current savings allocations.

We live in a mobile society, but proximity is a critical

issue in caregiving. It‟s hard to be a personal caregiver for

Dad when he lives in Florida and you live in Illinois. One of

the greatest financial upheavals in caring for an elderly parent

can be determining where it will take place. Will her daughter

leave her job to come live with Mom? Or will Mom move and

live with her daughter (and family)? Selling a house, leaving a

job, putting an addition on an existing home – these are big

financial decisions. If such a move is on your horizon, it might

affect your saving priorities and accumulation strategies.

The rising trend of adult children caring for aging parents

almost requires a multi-generational approach to financial

decision-making – for parents and their children. In many

ways, the necessity to integrate the financial objectives of

several families that share common bonds can result in greater

benefits for all, as the whole performs better than the sum of

the parts. Although there are certainly costs associated with

the decision to care for aging parents, there may also be

significant opportunities.

AS A PARENT OR A CHILD, IS CAREGIVING IN YOUR FUTURE?

WOULDN‟T NOW BE A GREAT TIME TO SEE HOW INTER-GENERATIONAL STRATEGIES COULD HELP?

_________________________________________________

GETTING ORGANIZED: Essential Documents to Store in One File Cabinet

Working from a list that appeared in a Saturday, July 2,

2011, Wall Street Journal article, here are essential personal

and financial documents that should be readily accessible by

you or your heirs in an eldercare situation. Your personal

circumstances might not require having every item listed here,

but the categories reflect the range of issues relevant to caring

for an aging parent. Consolidating and organizing this

information is not only a great benefit to you while you‟re

living, it is also invaluable for your heirs.

By the way:

While having original documents and physical copies collected in one file cabinet is a fundamental of good financial organization, maintaining an electronic back-up file, such as the online data storage programs offered by many financial institutions, is a superb secondary location for the same documents. Check with one of your financial professionals to see if they offer this service.

Marriage and Divorce:

Marriage license(s)

Divorce papers

Health Care History and Instructions: Personal and family medical histories

Durable health-care power of attorney

Authorization to release health-care information

Living Will

Do-not-resuscitate instructions

Proof of ownership: Housing, land and cemetery deeds

Escrow mortgage accounts

Proof of loans made and debts owed

Vehicle titles

Stock certificates, savings bonds & brokerage accounts

Partnership and corporate operating agreements

Tax returns

Life insurance and retirement: Life insurance policies

Individual retirement accounts

401(k) accounts

Pension documents

Annuity contracts

Bank Accounts: List of bank accounts

List of all user names and passwords

List of safe-deposit boxes

The Essentials: Will

Letters of instruction

Trust documents

________________________________ FROM 107 TO 1,124 IN 32 YEARS. Should you be impressed?

The following factoid was part of the August 22, 2011,

edition of “By the Numbers,” an online business news digest:

On August 13, 1979 (i.e., 32 years ago), Business-Week’s cover story was titled “The Death of Equities.” The S&P 500 closed at 107 on 8/13/79. The index closed at 1,124 on 8/19/11 (source: BusinessWeek).

Some interesting facts, yes? But how should we interpret

them? Here‟s a possible response: Left for dead 32 years ago,

the stock market has proven a resilient and profitable

investment over the long run. Another implication might be

that just as the pessimists were wrong three decades ago,

today‟s stock market pessimists could be wrong as well. It‟s

pretty clear, isn‟t it?

Well, sort of. The factoid above was just three short

sentences. It is concise, and after all, growing from just above

100 to over 1,100 represents substantial growth, doesn‟t it?

Maybe there‟s more to the story.

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This newsletter is prepared by an independent third party for distribution by your representative. Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites are

for your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not

recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above referenced publications nor recommend or endorse them in any way.

For example…if you do the math, the growth of 107 to

1,124 over 32 years works out to an average annual increase

of approximately 7.6%. While that number isn‟t bad, it is

probably not what many would consider a “substantial”

above-average long-term rate of return.

If those calculations diminish the factoid‟s impact a bit, an

assessment of the S&P‟s performance might be even less

enthusiastic when some other historical details are brought to

light. Using an interactive website, it was possible to create a

mountain chart illustration specifically reflecting the index‟s

32-year performance from August 1979 to August 2011. See

the graph below.

Several things jump out. The S&P‟s price today is lower

than it was in November 2000, which means the average

annual return for the past decade has been slightly negative.

And although the 10-year numbers are flat, the degree of

fluctuation during the decade has been significant. Looking at

the long-term history, the index appears to record two distinct

periods: The first is characterized by a steady upward climb

above 1,400 over 20 years, while the second era is marked by

steep peaks and valleys.

As you dig deeper into the numbers, has your assessment of

the initial 107-to-1,124 statement changed? Probably. But

besides changing your perspective on past performance, how

would you use this information to make a decision about

future investment opportunities in the S&P? Is the future

going to be one of continued volatility or is the index about to

enter another unique period of steady results? If so, is it

possible that the next trend may be steadily downward? Those

are questions that probably can‟t be answered without

conducting even further research.

The Information Age makes a sea of facts readily available

to everyone. The crucial factor in making informed financial

decisions isn‟t just getting the information. Rather, it is

knowing how to evaluate the data, and determine which facts

are relevant to your situation.

WHO HELPS YOU EVALUATE THE FINANCIAL FACTS OF YOUR LIFE?

DO YOU KNOW (AND UNDERSTAND) THE CRITERIA?

IS IT TIME FOR ANOTHER ASSESSMENT?